Euro-Region Economy Contracts as Investment, Exports Decline

Gross domestic product shrank 0.3 percent from the third
quarter, the European Union’s statistics office said today,
confirming an estimate published on Feb. 15. Exports fell 0.4
percent after a 1.4 percent gain in the previous three months,
while household spending declined 0.4 percent and investment
dropped 0.7 percent.

While Europe is facing its second recession in less than
three years, the economy shows “tentative signs of
stabilization,” European Central Bank President Mario Draghi
has said. ECB efforts to pump cash into the economy have helped
ease concern about a credit crunch and won governments time to
agree on measures to contain the debt crisis.

“The region is still facing major headwinds, notably
including increased fiscal tightening in many countries and
markedly rising unemployment,” said Howard Archer, chief
European economist at IHS Global Insight in London. “Despite
some recent overall improvement in euro zone surveys and
evidence that Germany is returning to growth, we doubt that the
euro zone will be able to avoid further contraction in the first
quarter of 2012 and very possibly the second.’”

European investor confidence rose for a third month in
March, the Sentix research institute said yesterday.

ECB Loans

The ECB lent 800 banks 529.5 billion euros ($698 billion)
for three years last week in the biggest single refinancing
operation in its history, taking total long-term lending above 1
trillion euros. Euro-area finance ministers the same week
authorized the region’s bailout fund to raise money for Greece’s
bond exchange, the first step in releasing funds from a 130
billion-euro rescue package.

ECB policy makers including Draghi and Ewald Nowotny from
Austria said they expect the central bank loans will be
channeled to households and companies, helping to boost the so-
called real economy.

The economy will likely be “turning the tide in the coming
months,” Olli Rehn, the EU’s commissioner for economic and
monetary affairs, said today.

So far, the Stoxx Europe 600 Index (SXXP) has gained 8.8 percent
and yields on debt of European sovereigns and banks have
tumbled. Germany’s Audi AG (NSU), the world’s second-largest maker of
luxury vehicles, said March 1 that it is targeting 2012 profit
“on par” with last year’s record results as higher sales
offset increased spending on new models and factories.

Shrinking Services

Even so, euro-area services output shrank more than
estimated in February, led by Italy and Spain, a survey of
purchasing managers showed yesterday.

The 17-nation euro economy may shrink 0.3 percent this
year, driven by a contraction of 1.3 percent in Italy and 1
percent in Spain, the European Commission said on Feb. 23.
Germany’s economy, Europe’s largest, will expand 0.6 percent,
according to the commission.

The ECB will leave its benchmark lending rate at 1 percent
when policy makers meet in Frankfurt on March 8, according to
the median of 58 forecasts in a Bloomberg News survey, giving
officials time to weigh the impact of the cash injection and
consider new economic and inflation forecasts which will be
released on that date.